The adoption of cryptocurrencies by financial institutions and payment providers is set to ignite a state of “hyper-growth” for digital payments globally.
That’s according to Pat Thelen, VP of Global Account Management at blockchain-powered payment provider Ripple. He believes that crypto-enabled payments are among a number of key trends that are set to define the payments space in the next few years. Here, The Fintech Times sits down with Pat to discuss crypto enabled payments and the future of the payments industry.
How do crypto enabled payments work? What are the benefits of crypto enabled payments?
The current cross-border payments systems have been designed for high-value payments – with globalisation, the need for remittances and low-value payments has increased. When we look at traditional correspondent banking, there is a complex system of multi-hops that a payment must make from one country to another to reach the end beneficiary, resulting in cross-border payments that are opaque, slow and costly. Often there can be between 5-15 different hops from one bank to the next – a system riddled with errors and messages that only move one way. As a result, financial institutions must pre-fund Nostro accounts on each side of a transaction in that country’s native currency. However, these accounts come at a high cost and lock-in funds that could be used as working capital in other areas of the business. Oftentimes, these high costs are passed along to the people who have the least – on average it costs $14 to send $200 cross-border remittances.
Similarly, small & medium-sized enterprises (SMEs) experience exorbitant costs as well as high expectations from their customers. Delayed payments to overseas suppliers, employees or other critical partners can be very damaging to these businesses.
Digital assets and blockchain-based technology have the capability not only to lower the cost of the overall transaction, they also allow for real-time settlement. Financial institutions, banks and even e-commerce companies can free up the tapped capital that would normally be committed to funding Nostro accounts around the world. Even better, these financial institutions banks that would usually be locked out of transacting on their own, can now engage in international, cross-border payments directly. This cost-saving can also be passed along to their customers.
Why do you think crypto enabled payments are going to be a key trend?
The current global financial system does not meet the needs of 1.7 billion unbanked people and millions of SMEs globally. Digital assets and blockchain technology have the potential to transform how unbanked and underbanked populations and underserved businesses access basic financial services and send and receive money across borders, making it more accessible, affordable and secure.
Most global banks are not able to serve the unbanked and unserved segments, not because they don’t want to, but because the existing corresponding banking model is too costly and inefficient, resulting in a lack of transparency into third party charges, hefty transaction fees and lengthy delays. Up until a decade ago, this wasn’t possible. Now with new technology and the adoption of crypto – many players are recognising that blockchain and digital assets could provide easier ways for unbanked individuals to access the global payment ecosystem and an opportunity for more efficient and affordable payment services.
Are there any risks or challenges involved – for example there is still some wariness around cryptocurrency?
Regulatory clarity is a big problem across the industry. In many jurisdictions, there is no clear regulatory framework for how consumers and businesses can properly use cryptocurrency, while others like the UK and Singapore are leaning into innovation and providing clarity for consumers and businesses alike to understand how they’re able to engage with these new technologies.
The lack of regulatory clarity is stifling innovation in some countries, and driving interest and investments to elsewhere. We’ve now come to an inflection point within the industry where this needs to be addressed. We’ve come a long way since the days of Silk Road – market participants today understand the benefits of crypto and blockchain – we just need to understand the rules of the road.
Has the Covid-19 pandemic accelerated the uptake of these kinds of payments?
Financial institutions and payment providers have had a duty to provide essential services during the COVID-19 crisis — especially when it comes to delivering remittances cost-effectively without interruption to developing economies. Payments made with blockchain and digital assets have provided an essential service during the pandemic to lower the cost of cross-border payments where possible.
There’s no doubt that throughout history, great disruption has accelerated change. In enacting this change, some business decision-makers have made necessary changes that ensured that innovations borne out of the current crisis endure and lead to better services for the future. Being faced with a global shutdown demonstrated the gaps we have in the current system and put a spotlight on why we need alternative payment methods, especially for those in underbanked communities.
What do you think the other key trends will be going forward in the payments industry?
We’ve seen a growing awareness towards the sustainability of payments, and more specifically towards the sustainability of crypto. digital payments. It’s no question that crypto and blockchain will be part of the future of finance. As more companies and financial institutions use this technology, the industry needs to make a concerted effort to address the environmental impact of high energy consumption from proof-of-work models and make renewable energy accessible and cheap for cryptocurrency miners.
Making the transition to a clean energy future and reducing carbon emissions can save the global economy some $26 trillion by 2030. As cryptocurrencies become mainstream and interest in Bitcoin increasingly grows, so will the entire industry’s carbon footprint. It’s easier to build a more sustainable ecosystem now than to reverse engineer it at a later growth stage.
Do you think that financial institutions are going to experiment more in the crypto space? Is crypto the future of finance?
So far in 2021, we’ve already seen unprecedented adoption of crypto by not only consumers but for institutions like PayPal, Visa, Square and more.
A big opportunity for innovation is where fintech and traditional finance can partner together. Innovation could be at the forefront of product development, combining the established reach and influence of traditional banks with the industry-leading tech and new talent at the disposal of fintechs. Offering these innovative services as a team would help to boost trust in fintech’s financial services to a greater level, and could give established banks’ customers a far faster and more contemporary experience.
If fintechs and banks were to build this kind of continued and mutually beneficial relationship, more services could be elevated to modern standards of customer service and speed as we continue to pull legacy banking systems out of their comfort zone and into the modern era of banking. New technology is providing more options for consumers – financial institutions that don’t take note and evolve their offerings to meet consumer demand will be left behind.
